PBOC Injects Funds to Ease Cash Squeeze Ahead of Long Holiday

Tourists enter the scenic area of the Yungang Grottoes in Datong, north China’s Shanxi Province, Sept. 18, 2013. The Yungang Grottoes, a World Heritage site carved on a one-km-long cliff, witnessed a tourism peak recently as the Mid-autumn Festival and National Day vacations arrive.

ZUMAPRESS.com

China’s central bank weighed in to ease concerns about a repeat of another cash crunch, injecting a large amount of funds into the country’s financial system Tuesday as borrowing costs have risen ahead of a long public holiday.

It’s the first time that the PBOC has poured cash into the interbank market since July 30, when it injected CNY17 billion. It’s also the biggest single-day liquidity injection since Feb. 5, when the PBOC flooded the market with CNY450 billion in the runnup to the Lunar New Year holiday.

China’s businesses and markets will be closed for a week in early October for the National Day holiday. The so-called “Golden Week” or similar long public holidays typically trigger a surge of demand for cash for gift purchases and travel expenses.

Borrowing costs in the interbank market have also been creeping up in recent days as the banks started raising cash to meet capital requirements due at the end of each quarter.

“The PBOC is apparently taking a more flexible approach in adjusting liquidity conditions, especially after the credit crunch in June,” said Chen Long, analyst at Bank of Dongguan.

The central bank’s open market operation is becoming more targeted because interbank interest rates tend to rise faster in the last week of September, Mr. Chen said, adding that the PBOC “won’t allow” the recent cash crunch to be repeated.

The seven-day repurchase agreement rate, a benchmark of interbank borrowing costs, dropped slightly to 4.35% Tuesday from 4.40% Monday, but still above 3.75% at the start of the month. It hit a record 30% in an isolated trade on June 20, and averaged nearly 12% when the cash crunch was at its worst.

Nevertheless, the rate is again well above the 3.3% it had averaged this year before the credit squeeze started in late May.

The People’s Bank of China allowed interbank lending rates to spike in June in the hope of reining in aggressive and reckless financing by banks. That left some small- and medium-size banks caught short of cash to repay investors in wealth-management products, which have exploded in popularity recent years as investors sought higher yields.

With the PBOC still wary of the side effects of extremely loose monetary conditions, it is keen to keep a “tight balance”, or steady but slightly higher borrowing costs from now on, Mr. Chen said.

The PBOC drained a net CNY8 billion from the banking system last week via its regular open-market operations, following a net CNY1.1 billion withdrawal the previous week.